‘Vacant’ vs. ‘Unoccupied’: When it Comes to Insurance, They’re Not the Same Thing

Temporary building closures can put businesses at risk of losing their coverage.

The COVID-19 pandemic continues to force thousands of U.S. retailers to close their doors. A recent report from Coresight Research shows that U.S. retailers could close between 20,000 and 25,000 stores this year — about 60% of them in malls. That’s significantly higher than Coresight’s original closure estimate of 9,000 stores, which came out in March as the pandemic took hold across the country.

While closing the doors helps reduce costs such as utilities and the payroll for workers, it also puts the property’s insurance coverage at risk. The status of the property as either vacant or unoccupied can be the determining factor in the payment of claims.

What’s the Difference?

The occupant’s intention to return is at the heart of whether a building is considered vacant or  unoccupied.

“Vacant” properties face a higher risk of loss compared with facilities that are simply “unoccupied.” Most insurance policies for commercial properties include coverage restrictions for vacant buildings, which are also known as vacancy clauses. They restrict coverage for incidents such as theft when a building has been vacated for a set period of time, generally 30 or 60 consecutive days. For losses that are covered in vacant buildings, insurers typically pay the actual cash value instead of replacement costs.

By contrast, buildings deemed “unoccupied” are still maintained. Power and utilities are generally left on. Equipment, merchandise and furnishings may remain inside. Unoccupied but preserved facilities have a greater chance of having their claims covered by their insurance policies.

Here are some scenarios that could lead to a property being labeled “vacant,” which can compromise property coverage:

• Appearance and security. A jewelry store that’s well lit and secured even while unoccupied will be less likely to be broken into or vandalized than another one that is dark and lacks security. 
• Water damage. Some building owners shut off the heat in empty buildings to reduce costs. If this happens in winter and a pipe bursts, there’s a greater chance of water damage. Days or weeks could pass before damage is uncovered in a vacant building. A building that receives regular maintenance even when unoccupied is less likely to experience water damage.
• Fire protection. A facility will likely be deemed vacant if the sprinkler system is disengaged and fire pumps and alarms are not tested or serviced regularly.
• Use signage. Place signs in a window to demonstrate that the location has visitations or showings.

Navigating Property Coverage

Here are some best practices for ensuring property coverage when facing a business closure:

• Check the property policy. Verify the language in the vacancy clause, if there is one.
• Create a plan for the facility. If tenants will return to the facility relatively soon, remove all perishables and valuables from inside and secure doors and windows. Spell out the duties of support employees, security personnel or facilities managers who are inspecting or maintaining the site. Some expectations include regularly testing faucets and the fire and sprinkler system. Make sure they continue to abide by all federal, state and local safety rules.
• Actively maintain the property. Don’t shut off the heat. Test fire alarms and sprinkler systems. While these measures may add costs, they can greatly reduce the risk of a building being considered “vacant.” They will also mitigate any potential damage to the building.

While the COVID-19 pandemic has left the fate of many facilities across the U.S. in limbo, understanding the difference between a “vacant” and an “unoccupied” property can be a game changer for maintaining coverage during the crisis.

James “Chip” Stuart is the chief sales officer for HUB International of California.